LUT vs Bond Under GST: Which One Should Exporters Choose?

Exports from India fall under zero-rated supplies under GST. This means the government intends your exports to leave the country without any tax burden, so you can price competitively in global markets and grow without indirect taxes eating into your margins.

Despite this clear policy intent, exporters often face a practical cash-flow challenge. When you export with payment of IGST, the tax amount remains locked until the refund is processed. Since refunds can take time, this upfront tax payment can tie up working capital that you need for operations, marketing, or scaling your export business.

To address this, GST provides two mechanisms that let you export without paying IGST upfront: the Letter of Undertaking (LUT) and the Export Bond. Both serve the same purpose but they differ in eligibility and compliance requirements. This guide breaks down LUT vs Bond under GST, helping you understand how both work, who can use them, and which option fits your business best.

What Is a Letter of Undertaking (LUT)?

A Letter of Undertaking is a simple declaration that lets you export goods or services without paying IGST upfront. The LUT functions as a self-declaration where exporters promise to comply with GST rules while exporting. Most businesses prefer this route because it requires no financial collateral and preserves working capital entirely.

Who Is Eligible for LUT?

• All registered GST taxpayers can generally opt for LUT.
• Specific exclusion applies: Exporters prosecuted for offences under CGST/IGST Act where tax evaded exceeds ₹2.5 crore cannot furnish LUT.

Because this exclusion applies only to serious offences, the LUT remains the default choice for most compliant exporters operating in India.

Validity and Renewal

An LUT is valid for one financial year, running from 1 April to 31 March. It does not carry forward automatically into the next year.

You must file a fresh LUT at the beginning of every financial year before raising export invoices. Exporting without a valid LUT for the current year triggers demands for IGST payment, defeating the zero-rated benefit entirely.

What Is a Bond in GST?

While LUT suits most exporters, some must use the alternative mechanism. A Bond under GST represents a formal agreement between the exporter and government, guaranteed by a third party (typically a bank). This instrument serves as a safety net for tax authorities when dealing with exporters whose compliance record raises concerns.

Who Must File a Bond?

• Exporters with a history of tax evasion where the amount involved exceeds ₹2.5 crore under GST laws.
• New exporters, in some cases, if the Jurisdictional Commissioner seeks additional assurance due to limited compliance history.
• Exporters who voluntarily choose a bond, though this is uncommon because of the cost and liquidity impact.

Bank Guarantee Requirement

A key difference between LUT and a bond is the financial backing. A bond is not just a written promise, it requires a bank guarantee.

Here is how it works in practice:

• The bond value usually equals the estimated tax liability on exports
• A bank guarantee, typically around 15% of the bond amount, supports this bond
• The bank blocks funds or limits your credit line to issue this guarantee

This directly affects liquidity. Money tied up in a bank guarantee cannot be used for daily operations, marketing, or scaling exports. For this reason, exporters generally prefer LUTs whenever they qualify, and use bonds only when required by law.

LUT vs Bond: Detailed Comparison

Choosing between an LUT and a Bond can feel confusing at first. Both routes lead to the same outcome you export under zero-rated supplies without paying IGST upfront. The difference lies in how much effort, cost, and risk you take on to get there.

Eligibility Criteria

• LUT: Open to almost all registered exporters who have not been prosecuted for serious tax evasion. For compliant businesses, this is the default route.
• Bond: Applies mainly to exporters who fail to meet LUT conditions, including those involved in tax evasion cases exceeding ₹2.5 crore or flagged for specific compliance risks.

Financial Implications

• LUT: There is no cost at all. You do not block funds, provide guarantees, or incur paperwork expenses.
• Bond: The bond cost can be significant. You usually need a bank guarantee, which ties up capital, along with stamp paper and related charges.

Application Process

• LUT: Filed completely online through the GST portal. Once submitted, you receive an Acknowledgement Reference Number (ARN) almost instantly.
• Bond: Often involves physical paperwork. You may need to submit the bond, bank guarantee, and supporting documents to your jurisdictional GST office.

Risk and Compliance

• LUT: If you fail to meet export conditions, you must pay the applicable tax along with interest.
• Bond: The risk is higher. The government can invoke the bank guarantee, leading to immediate financial loss.

LUT vs. Bond Differences

How to Apply for LUT and Bond?

Understanding application procedures helps exporters execute their chosen option correctly. Both mechanisms use Form GST RFD-11, but submission methods and requirements vary significantly. Let’s examine the specific steps for each pathway.

Steps to File LUT Online

Filing an LUT online takes only a few minutes if your GST registration is active.

1. Log into GST Portal and navigate to Services → User Services → Furnish Letter of Undertaking.
2. Select the correct Financial Year from the dropdown list.
3. If you filed an LUT earlier, upload the previous LUT details. Otherwise, tick the self-declaration checkboxes confirming compliance.
4. Enter details of two independent witnesses including names and complete addresses.
5. In the Name of Primary / Other Authorised Signatory drop-down, select the authorised signatory linked to your GST registration.
6. Sign using Digital Signature Certificate (DSC) or Electronic Verification Code (EVC).
7. The system generates ARN immediately upon submission.

Procedure for Submitting a Bond

If you are not eligible for LUT, you must submit a bond under GST, which involves additional paperwork and coordination with your bank.

1. Prepare the export bond on non-judicial stamp paper of the required value.
2. Arrange a bank guarantee from your bank, usually for a prescribed percentage of the bond amount.
3. Fill Form GST RFD-11 and prepare a short covering letter.
4. Submit the complete physical setbond, bank guarantee, RFD-11, and covering letterto your Jurisdictional Deputy or Assistant Commissioner.
5. After verification, the officer issues an acceptance letter, allowing you to export without IGST payment.

Consequences of Non-Compliance

Filing an LUT or a bond only gives you permission to export without paying IGST upfront. The real responsibility starts after that. You must meet the conditions attached to these facilities within the prescribed timelines.

If you miss these conditions, GST treats the export as if the exemption never existed. What was meant to be a tax-free export can quickly turn into a taxable supply, along with interest and possible withdrawal of future benefits.

Failure to Export Goods Within 3 Months

• Rule: Exported goods must leave India within three months from the invoice date.
• Consequence: If this timeline is missed, the exporter must pay IGST on the goods along with 18% interest, calculated from the invoice date.
• Recovery: The tax authorities may withdraw the LUT facility or encash the bond, including the associated bank guarantee.

Failure to Realise Payment for Services

• Rule: For export of services, payment must be received in convertible foreign exchange within one year from the invoice date.
• Consequence: If payment is not realised within this period, the supply becomes taxable retrospectively, and GST with interest becomes payable.
• Note: While RBI guidelines may allow extensions for realisation, GST compliance remains strict unless such extensions are specifically recognised.

Streamline Your International Payments with Razorpay

Once you have clarity on LUT or bond compliance, the next step is making sure your international payments come in smoothly and on time. Razorpay offers a single, integrated setup that helps exporters receive funds from overseas clients without unnecessary complexity or cost surprises.

• You can accept international payments from customers across 180+ countries using global cards, Apple Pay, Google Wallet, and bank transfers, all through one platform. This makes it easier to serve overseas clients without setting up separate arrangements for each market.
• Razorpay also enables local bank transfers for international clients, allowing them to pay you like a local while you receive the funds in India, converted into INR.
• The platform supports collections in 130+ foreign currencies, which helps you invoice clients in a way that feels familiar to them and reduces payment friction.
• With transparent pricing and no hidden forex markups on international bank transfers, you get better visibility on what you will actually receive from each transaction.
• All international payments are tracked through a single dashboard, so you can monitor receipts, settlements, and statuses without juggling multiple tools.

Conclusion

For most compliant exporters, the LUT under GST is the clear choice. It costs nothing, takes only minutes to file online, and keeps your cash flow free from blocked IGST payments. The Bond route exists mainly as a backup for businesses that do not meet LUT eligibility and are willing to manage added paperwork and bank guarantees.

Whichever option you use, sticking to export timelines three months for goods and one year for services is critical to retain zero-rated benefits and avoid tax demands. Before the start of every financial year, review your eligibility and file your LUT early so your exports continue smoothly from day one.

FAQs

1. What is the main difference between LUT and Bond?

An LUT is a compliance-based promise with no security or cost, while a Bond is a legal undertaking backed by a bank guarantee, used when an exporter does not qualify for LUT.

2. Who is eligible to file an LUT under GST?

Any GST-registered exporter of goods or services can file an LUT, as long as they have not been prosecuted for tax evasion involving an amount exceeding ₹2.5 crore.

3. Is a bank guarantee mandatory for filing a Bond?

Yes. Filing a Bond generally requires a bank guarantee, typically around 15% of the bond value, to safeguard the tax authorities’ interests.

4. What is the validity period of an LUT?

An LUT is valid for one financial year and must be filed again before the next year begins.

5. What happens if exports are not completed within 3 months under LUT?

If goods are not exported within three months from the invoice date, you must pay the applicable IGST along with interest for that supply.